The rise in interest rates of recent years has created some great rotation opportunities for life companies, it would seem. "I would call it the fixed income renaissance", Ruth Farrugia, global head of insurance asset management for MetLife Investment Management (MetLife IM) told Insurance Asset Risk.
Farrugia's team is responsible for strategic asset allocation, tactical asset allocation, as well as investment strategies for both MetLife IM's parent company and third-party insurance clients. Beyond pure asset management, the team also offers an advisory service, again both for the parent group and third parties.
This advisory business – which covers analytical and optimisation work, impact scenarios, and 'validation' of allocation strategies – has really taken off over the last couple of years, Farrugia told Insurance Asset Risk, because of the volatility in markets.
"There has been a lot of discussion around the appropriateness of capital assumptions [in that environment where] your assumptions really [were] changing by the minute," she said. "The volatility seen in the last few years [in terms of switching from] risk on / risk off so often [has reached levels unseen before]."
Nevertheless, these are exciting times from an opportunity set point of view, Farrugia said, even if it requires life companies who are sitting on huge unrealised loss positions to really be mindful around their budgeting for those losses.
"From an economic standpoint, it's great, because there's a very good argument to be made that you want to try and bolster your income now," she said. "There are great opportunities; it's definitely an investment-grade fixed income 'Renaissance' in a way, because you don't even have to stretch out – you can really kind of retain an up in quality bias and really get good returns to bolster your income for the future."
For new business, it's straightforwardly "an amazing time", but when it comes to the in-force portfolio and looking at rotation opportunities, insurers have to be thoughtful about their losses, and budget well for their interest maintenance reserves.
"Irrespective of which camp you're in, whether you believe it's going to be a soft landing, a hard landing, or somewhere in between, like a mild recession, at this point in time, look at your portfolio, look at areas of vulnerability, and then budget accordingly," she said. "If you budget for your losses appropriately, without being greedy, you can retain a quality bias, you can move more towards the safer components within the asset opportunity sets."
But what do central banks' hints toward the end of interest rates hikes and economists' predictions of a recession in the second half of 2024 mean for the 'Renaissance of fixed income' narrative?
This is an issue constantly debated, Farrugia acknowledged. All signs point to a cut in interest rates in coming months with a 'normalisation' of the yield curve, she said.
From an interest rates standpoint, even if they go down, they won't reach "the anaemic levels of pre-COVID years". Economically, labour market data are softening and companies with high leverage will struggle in the coming years.
The greatest question remains what spreads are going to do, Farrugia says. "A few years back, we had seen in Europe a negative correlation between rates and spreads. It might not play out that way [this time around]."
But these "pockets of vulnerability" in the economy really mean opportunities for investors that are well positioned, she said. "Even in high yield, I think there will be some good entry points."
"Insurance companies have been very thoughtful. Even in the lead up to COVID, there was a lot of de-risking done, and there was a lot of de-risking done during COVID," she said. "The last two years have been difficult and challenging. But, if I have to think positively, they've also provided insurance companies with an amazing opportunity to upgrade from a credit point of view, from a rating point of view, but also to shore up your economic and harvest income for the future."
If the first half of 2023 was a public market narrative, "the last quarter has been a private assets story", Farrugia said, "and we are seeing some of the Q4 pipeline spilling over to Q1".
Most of the opportunities are in investment grade private placement and private infrastructure, she highlighted. When it comes to middle-market private credit and direct lending, there are some opportunities, she said, "but you have to pick your spot and make sure you are going with managers that are going to survive the turn of the cycle".
Asked about the NAIC's ongoing work on private structured credit, Farrugia said there was a bit of uncertainty on the timing and what would come out of it, but she took "comfort in the fact that MetLife has always been, and continues to be, very thoughtful around our structuring, making sure that the underlying actually meets and aligns to the expectations of the rating, but also that the underlying is providing the right stream of cash flows, that matches the rating of the actual structure or fund that we might have invested in or created".
People:Ruth Farrugia